A reverse mortgage lets homeowners aged 62 or older convert part of their home equity into cash without selling or making monthly mortgage payments. Instead of you paying the lender, the balance grows over time and is repaid when you leave the home. These loans can support retirement income but carry costs and obligations that demand careful understanding.
How the loan flows in reverse
With a traditional mortgage, you pay the lender and your balance falls; a reverse mortgage flips this, so the lender pays you and the balance rises. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the FHA and available through approved lenders. You can receive the money as a lump sum, monthly payments, a line of credit, or a combination. Interest and fees are added to the balance, which accrues until the loan comes due.
When the loan must be repaid
A reverse mortgage becomes due when the last borrower dies, sells the home, or permanently moves out, such as into long-term care for more than a year. At that point the loan is typically repaid by selling the home, and any remaining equity goes to you or your heirs. HECMs are non-recourse, meaning you or your estate never owe more than the home's value when the loan is settled, even if the balance grew larger. Heirs can also choose to keep the home by repaying the loan balance.
Ongoing obligations you keep
You remain responsible for property taxes, homeowners insurance, and maintaining the home, and failing to pay taxes or insurance can trigger default and foreclosure. You must also keep the home as your primary residence; moving out generally makes the loan due. Because the balance grows and equity shrinks over time, a reverse mortgage reduces what you can leave to heirs. These obligations make a reverse mortgage a serious commitment, not free money.
Costs, counseling, and alternatives
Reverse mortgages carry upfront costs including origination fees, FHA mortgage insurance premiums, and closing costs, which can be substantial. Federal rules require prospective HECM borrowers to complete counseling with an approved, independent counselor to ensure they understand the terms. Alternatives worth weighing include downsizing to a smaller home, a home equity loan or HELOC, or other retirement income sources. A reverse mortgage can be a useful tool for the right household, but only after comparing it against these options.
A 70-year-old with a paid-off $500,000 home takes a HECM line of credit and draws $100,000 over several years for living expenses. No monthly payment is required, but interest and insurance premiums are added to the balance, which grows. When she later sells to move near family, the loan is repaid from the proceeds and the remaining equity is hers.
Key takeaways
- A reverse mortgage pays the homeowner and the balance grows, the opposite of a normal mortgage.
- The most common type, the HECM, is FHA-insured and available to owners aged 62 and older.
- The loan comes due when the last borrower dies, sells, or permanently moves out.
- HECMs are non-recourse, so you or your heirs never owe more than the home is worth at repayment.
- You still must pay property taxes and insurance and maintain the home, or risk default.
Common mistakes
- Assuming a reverse mortgage has no obligations, then defaulting by missing property taxes or insurance.
- Overlooking the substantial upfront costs and insurance premiums that reduce the net benefit.
- Failing to compare a reverse mortgage against downsizing or a HELOC before committing.
FAQ
Can I lose my home with a reverse mortgage?
Yes, if you stop paying property taxes or homeowners insurance, fail to maintain the home, or no longer live there as your primary residence. Meeting those obligations is essential to avoid foreclosure.
Will my heirs inherit debt?
No. HECMs are non-recourse, so heirs never owe more than the home's value. They can repay the balance to keep the home or sell it, keeping any equity that remains after the loan is settled.